It is common knowledge that auto insurance distributed via the direct, online channel is much less profitable than agent business. But why is that? And is it likely to persist?
Carriers that distribute through agents have historically earned their profits through “seasoning”, first year business is unprofitable but profitability improves as carriers run off bad customers and renew the rest. This contrasts with the direct channel where customers tend to shop their insurance frequently because carriers have made shopping online so easy. And since it’s easy to shop, direct customers find it easy to use multiple online quotes to figure out just which combination of less than honest data can generate the lowest premium for them.
So good news for agent-centric carriers right? Not really. We know that more and more agent customers are using online quote sites to shop for their insurance. Once they find the policy they want, they buy it from an agent. But this means that they are both learning how easy it is to shop at every renewal and how easy it is to manipulate their rate.
If you want to see where all of this is going, look at the United Kingdom: there, virtually all shopping happens on line either using carrier quote systems or more often, aggregator sites with both frequent shopping and rate manipulation being common. But most customers still buy their policies from agents. The result is a terrible, unprofitable auto insurance market with average loss ratios much higher than in the US..
And this “British disease” is now becoming a problem for US carrier. With older baby boomer customers being replaced by their younger, much more internet savvy offspring, the level of rate manipulation and churning will inevitably rise. Indeed in our work with carriers we’ve found that direct channels have 20 to 30 points of preventable fraud baked in at the point of sale.
Therefore even Agent-centric carriers must aggressively fight point of sale insurance fraud. If they don’t, they’ll discover that more and more of their business is ‘first year’ business.
We’re Veracityid (www.veracityid.com) and we’d love to show you how we’re saving carriers up to twenty points of loss ratio by eliminating fraud before it’s baked into a policy.
